#123: Different Angles of the Future

S2N Spotlight

Oil has been rising over the last week or so with all the middle east tension. I thought we would look today at the Brent Crude Oil Futures contract. The trick is which contract to look at, each give you a slightly different angle and I am sure many of you reading this were not aware of the drama that takes place under the hood of what seems like a simple commodity. By the way this applies to all futures I am just choosing to spotlight Brent Crude Oil.

We start with the Brent Crude Oil – Continuous Contract. You can see that it was rising up to the 200 day simple moving average and then dropping away against resistance.

I now look at the Brent Crude Oil – Continuous Back-Adjusted Contract. You can see in the chart below the price has shot through the 200 day moving average resistance. You confused yet? If yes good you should be. Let us look at a few more variations.

The continuous contracts above are synthetic creations that make it easier to plot charts in a nice continuous way. A trader actually trades the Futures contract for a specific end date. We will come back to this and explain further.

I am now going to look at the chart of the Brent Crude Oil – August 2024 contract. You see a slightly different picture to the 3 above.

We now look at the Brent Crude Oil – Sep 2024 Futures contract. Again a very different picture.

In the 4 different charts of Brent Crude Oil futures you see a completely different technical analysis setup for the 200 day simple moving average. So it is naturally important that you stay consistent with the version you use for your trade decisions. The question you have to ask now is which one is the correct one.

Before I attempt to answer, I want to share what the Brent Crude Oil Futures Chain looks like as of today. The futures chain plots the closing price of each futures contract per the delivery date of the contract. It will be hard for you to read on the chart, but it goes out to June 2031, where Brent is trading at $66. I will spare you the lecture that the shape of the curve is what is called “backwardation.” Which simply means that prices are lower the further you go out in time, which is unusual.

A continuous contract is a synthetic creation that stitches together multiple futures contracts into a single, continuous time series. It rolls over from one contract to the next at specific intervals, usually when the front-month contract (the nearest expiration date) is about to expire.

A back-adjusted continuous contract adjusts the historical prices to remove gaps caused by rolling from one contract to the next. This adjustment usually aligns the closing price of the expiring contract with the opening price of the new contract, making the price series smooth and easier to analyze over time. The back-adjusted contract can significantly differ from the raw continuous contract, particularly around the times of rollovers. This adjustment often results in smoother charts, which can be beneficial for technical analysis but may not represent the true prices that were tradable at those times.

If you wish to trade the actual future then you will need to pick a future contract according to a date that fits with your expected holding period. The shorter contracts have more liquidity than contract far out. If you trade CFD’s then you are effectively trading the continuous contract. Trade Nation is one of our sponsors where you get to trade the synthetic future.

To answer the question for technical analysis which contract to use. There is no one correct answer. If you are trading long term then I think the continuous back adjusted contracts are best. If you are trading short term then the actual contract might be best, but I do believe you can use the continuous back adjusted contract for short term trading decisions but not around the rollover dates, as there is a lot of fun and games that take place around this period.

S2N Observations

Yesterday a lower than expected PPI inflation report came out which fuelled a rally in the S&P 500. Today is CPI so let us see what happens today. I have gone short today.

In line with the mania of the day we saw the biggest spike in Starbucks share price yesterday on the announcement of a new CEO. See my comments on the chart for an ego perspective.

Something I haven’t commented much on is the seriously low 10 year Chinese Bond Yield. The reason it spiked a little recently is because, regulators told rural banks not to settle govt bond purchases, according to Bloomberg.

“In a highly unusual move on Friday, regulators told rural banks in China’s Jiangxi province not to settle recent purchases of government bonds, an order to effectively renege on their market obligations. It was the latest in a string of interventions designed to cool a market rally that sent yields to record lows and stoked official concerns that banks have become too exposed to interest-rate risk.”

Here is a look at the yield curve. I don’t really know what all this means other than the fact that interest rates remain low because the economy is hurting.

Finally for today. There has been so much talk recently that the US Yield Curve has un-inverted. According to my data as of the 12 August the curve is still inverted. Just saying.

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